Commentary on Economics, Information and Human Action

Cleantech opportunity: clean water for fracking

One of the most beautiful aspects of market processes is how individuals create and take advantage of new profit and growth opportunities by creating value for others. Here’s a case in point that will resonate with many of you, given the outstanding diligence and insight of Mike’s fracking analyses here: clean water for fracking is a hot cleantech opportunity:

In an interview this week with VantagePoint Capital Partner and Founder Alan Salzman, he told me that he sees technology that can help solve the clean water issue for fracking as an upcoming hot area for investment. “We think the limiting factor for gas fracking is water. We’re not gas people, and we’re not oil people. But we are water people,” said Salzman. He declined to name any specific company the fund is backing or looking at.

But if you read the article carefully, you’ll notice a fact that mitigates against my pro-market-process comment above:

Conglomerate GE is also working on more environmental methods of recovering and reusing water from natural gas fracking and is working with the DOE on research, too.

If fracking really is here to stay and growing, as Mike has discussed extensively, are these research subsidies necessary to induce innovation in water cleaning technologies? If so, on what basis? Is there a Coase problem here — does legal precedent fail to define legal liability sufficiently to clarify the profits attached to the water cleaning? Or, if that’s not the case, is the water cleaning insufficiently valuable to be worth doing? That hypothesis is consistent with the argument that fracking does not actually create a lot of water supply damage. But if that’s the case, then why subsidize the research — isn’t that a waste of taxpayer funding on research that isn’t likely to be valuable enough to be worth pursuing?

My arm’s-length, casual empricism about water and fracking is that the water issue is more about water use in fracking than about groundwater contamination, rather like ethanol manufacturing. But I’m curious about whether or not such “how cool is this?” innovation is arising from a desire to profit by creating value for others, subsidies because of a lack of well-defined property rights and legal liability, or subsidies because of crony corporatism in energy. In this area, all three are possible, although I’d assign more probability to the latter two rather than the virtuous profit motive.